Anyone who’s ever collaborated on a project understands that people do varying amounts of work and that tracking individual contributions is difficult. In startups, where there’s a potential for a financial upside following a sale or IPO, the issue of distribution becomes even more complex. How do you fairly reward people’s work when team members have all contributed in varying degrees and ways?

Casey Fenton may have a solution. The founder of Couchsurfing just launched Mastly, a service that allows organizations to track and share in real-time the amount of effort a contributor has put into a project and what portion of the ownership pie they currently own. It also helps teams streamline the legal steps required to get started.

I spoke with Fenton about this dynamic equity approach to collaboration, the biggest challenges startups face, and how Mastly hopes to replace an antiquated stock options system with one that enables entrepreneurs to dramatically increase the number of people who can contribute to a startup while rewarding everyone fairly. Here are the highlights of our conversation.

Cat Johnson: Let’s start at the beginning. What is Mastly, your latest startup?

Casey Fenton: Mastly is a way to capture and quantify the amount of effort that people have put into a project or company. Once you can quantify that you can determine, through a dynamic equity split, how much equity, or profit, people should get later, if any.

Eventually we hope to apply it to nonprofits and it can also work for control, as well, but for now it’s equity and financial upside and profit. We help distribute those things fairly and we help do it for any number of people. Usually when you have a company, lawyers will dissuade you from bringing in as many people as you want to help work on the project: it’s too dangerous, stockholders rights, people throw wrenches into the works, whatever. This separates some of that control and financial upside so you can include as many people as you want.

It brings us from the old, antiquated system of stock options into a new and updated system of transparency so you can see how much ownership you have in real-time. It also gives you the legal docs and the legal framework where it can work anywhere in the world.

Tell me more about the transparency in real-time piece. What does that look like?

For a company or project—a group of people who may want to work together—it organizes everything—with all of the intellectual property—together and says, this is owned by this group. Then it says, now we’re going to vote on a sweat equity pool of anywhere between 1% and 100%. Then you say the company is worth this amount. Then people start doing work—they start recording their efforts into the pool.

Let’s say you’re worth $100 per hour. You want to get $50 in cash and take a $50 per hour risk with the future of the company and add that to the pool. The next person, who is also $100 per hour, really believes in the company. They want to get $20 per hour in cash and $80 per hour in equity. That person’s going to start earning more of the pie than you will; they’ll earn it faster. You can include all kinds of people with all kinds of skillsets and based on their rates and the cash withdrawn. In real-time you can see how much of that pie they currently have. The pie keeps going until there’s a reason to stop, which is either a sale or an IPO.

Maybe the company will never get sold, so it doesn’t really matter, but if it ever were sold, at least you know what people should get. That gives people confidence to want to work on a socially responsible project that’s not a nonprofit, but some kind of hybrid. How do you work in a hybrid and give it your all, but not know if you’re going to get what should come to you if cash does show up—if a sale does show up.

What are the three top challenges startups face when doling out options?

The first is the chicken and egg. They’ve got an idea and you can usually get two people together to work on a project, but if you want to include more people than that, you start to need agreements so people know what to count on. But you’ve got a chicken and egg because, to get those agreements you have to go to a lawyer to get them written up, which is going to cost you $3,000-$10,000, potentially. You can’t get more people than two people together, generally, because you can’t pay for it.

The next problem is that generally with stocks, people have something on paper that says, I own 50% and you own 50%. Usually people initially just guess at who’s going to put in what amount and see what happens. It almost never turns out correct, so there’s already a major problem and you’re going to have to do cleanup work later to fix the problem. A lot of times that’s what kills the company.

The third is that, especially if they’re new to it, they don’t know what the best setting are or how to set a business up. There are all these knobs and dials you can turn when you’re creating a business, from a legal perspective and from a motivational perspective. Wouldn’t it be great if there was a way to just have the default settings that everyone agrees on?

How does Mastly addresses these challenges?

With the chicken and egg, Mastly is freemium. It’s initially free to use then it’s just $50 or $100 per month for some of the lower users. Now you have the legal docs that tie you together, even pre-incorporation, and can try it out to see how it goes. It ties together all the efforts because now you're recording what your efforts are. You can log in and record your efforts on an hourly basis, a daily basis, a monthly basis—whatever your unit of measure is—and see what those efforts are in real-time.

That solves the first two problems. You don’t run into a problem down the road where two of the four people aren’t putting in any work but they own half the company. You completely avoid that.

The next problem is having some nice default settings for a startup. We provide that and, the direction we’re moving is to handle not only the sweat equity piece, but all of the initial formation legal docs for a company, especially if you want to do it as a Delaware LLC or a Delaware C Corp.

Casey Fenton aims to update the "antiquated system of stock options" with Mastly. Photo: Jim Stone

Do people simply enter their work? Is there some kind of agreement about whether people are doing what they’re saying they're doing?

Everybody can see what everybody else is doing, by default. You can see everybody else’s hours. That’s a huge pressure for people to be honest. Anyone can see if someone’s not recording accurately and that person is not going to last very long on that team. That’s one piece of the transparency. The other piece is that the organization can use the approval system where something isn’t agreed upon until it’s approved by a manager.

Why is dynamic equity a better option for startups? What are some of the benefits of it?

What we’re doing is using a hybrid approach. Normal equity is that, if you work for the next four years, we’re going to give you 10,000 shares. You know what you’re going to get from the beginning. With dynamic equity, you set aside a pool—say a quarter of the company—and everybody is putting their efforts in and we’re recording those efforts and you can see, in real-time, how many of the shares you have. So everybody’s thinking, how do I make a bigger pie?

A dynamic equity split is what [ridesharing company] Juno is using. They’ve reserved 50% of their company for the drivers. They’re not issuing shares to the drivers today because they don’t know how many drivers they’ll have and there are other unknowns, but they know that, based on an algorithm, they could find a fair split for the drivers.

The reason dynamic equity is better is that, down the road when there’s a landmark event, you can choose which equity distribution is best for you at that time. We allow companies to defer that question and then make sure it’s fair for everyone.

Mastly uses real-time tracking so people can see what percentage of the performance equity pool they currently own.

I understand that Mastly stems, in part, from your experience with Couchsurfing. What were the challenges in rewarding effort at Couchsurfing and how is that informing your design of Mastly?

It took a lot of effort to build Couchsurfing—a lot of people working day and night, a lot of people busting their butts. When we had to convert from a nonprofit to a for-profit we weren’t allowed to take volunteers with us. It’s not legal in the U.S. We asked our attorneys how we can bring on 1,000 people as shareholders and they thought we were crazy.

It was clear that there was no system out there. The current system is setup to actively lobby against that notion. I started researching it and talking to people, including some of the best benefits and employment attorneys in the U.S.

It took me two years to really start to understand all the different types of equity — it is so complex. We’re taking a hybrid between the RSU [restricted stock unit] system that the top Silicon Valley companies are using for employment and also the phantom equity, performance equity system that allows us to work internationally and with even more people. They both have their benefits so we’re using a hybrid of both.

It was my dream, after Couchsurfing, to set up a system that thousands of people could participate in a project together and see the financial upside—instead of just a couple people. I also started seeing the inside of the meatgrinder when it comes to stock options. Stock options kind of suck. You give somebody some stock options but, unless they can hang on until an IPO or an acquisition, they’re probably going to lose the options because they have to buy them. People don’t realize that they have to buy the options to turn it into stock.

Startups are increasingly looking at ways to reward various levels of contribution in building a company, especially with people not officially on staff. What are your thoughts on company building as a crowdsourced effort, including the rise of platform co-ops?

Usually when you start up, a lot of people are working as contractors. You barely have a group together, you just start paying people to get work done. People need a way to give equity to those people and that’s what Mastly does—it allows you to give equity to contractors and employees both.

With the rise of the gig economy, wouldn’t it be great if all those people could take a portfolio approach to their work instead of just trading time for money. What if they could bet their sweat on the entities that they really believe in. What if you could go to a portal on Mastly, look at all the companies that are looking for help and how much cash and how much equity they’re looking to pay, then decide which company you believe in and which one you want to spend your time working on. Somebody who has a regular job could spend some of their off-hours practicing being an entrepreneur, betting their sweat, getting involved in startups. It’s a great way to help people get out from the lower rungs of the social strata. It’s hard to get out into the world where you have investments that are giving you dividends or that you can sell. This gives people more opportunity to practice that model and that pattern.

An interesting aspect of Mastly is to align the relationship between founders and teams. Can you tell me more about this?

A great company would have everybody thinking like a founder. A company where the people at the top have to make every micro-decision is a slow-to-move company and a company that’s probably going to fail.

It’s command versus intent. Instead of telling you exactly how to move and go over there and do this thing, the intent is, take that hill. If you know what the intent is, you can figure out the sub-intents under the larger goal or vision. It makes it easy for people to do a lot more work with a lot less communication and get it right.

I’ve been working with Mastly’s system for the last three years in a few different startups we’ve been testing in. What I’ve seen is, people are more likely to pushback and argue, which is good. You want people to second guess you. It’s their sweat on the line, it’s not just money for them. They’re not just there to do what you say, they have skin in the game. They want to make sure you find the right answer and when you have that many people asking if it’s the right answer, it has a really powerful effect.

These emerging platforms and services work, not just for workers or employees, but for contributors of all types. Who do you see Mastly benefiting the most?

We hope to benefit everyone equally. Everybody wins when there’s a synergistic relationship and an alignment. Maximum alignment means the ship goes further. If people are misaligned, you’re going slower and you’re going to have a smaller pie to split later.

What are your next steps at Mastly?

The next step is bringing on 100 customers. We’re emerging from stealth right now. We’re giving special pricing to the first 100 companies that sign up and use it. We want to take this to the market now and see all the ways people want to use this.

Anything you’d like to add?

In Silicon Valley, we are handed legal possibilities on a golden platter. We have a lot of attorneys around who understand startups. That’s really good for Silicon Valley but 99% of businesses aren’t here. So many people have great ideas that would do really well but they don’t have the right structure and format to fold all that into. Imagine a world where anybody can start a business, use best business practices and get people together in a fair and ethical way. Where they can focus more on the product they’re bringing to market than the quagmire of legal complexity.